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Concerns rise over costs at Rio mine in Mongolia

Mongolia will press global miner Rio Tinto to explain a spike in costs at the huge Oyu Tolgoi copper and gold mine, a government source told Reuters, warning that it could threaten efforts to finance other projects in the country.

Oyu Tolgoi, 34 per cent owned by Mongolia and controlled by Rio Tinto, produced its first concentrate last week and is on track to start supplying metal and paying royalties by June.

But the government, which is due to hold talks with Rio Tinto on Wednesday, is under pressure to plug a budget deficit and increase its share of the wealth.

"We would like to have some mechanism where we can control such cost increases. We do not know if they are justified," said the source, who requested anonymity and said that the cost of the first-phase of the mine was around $US2 billion higher than originally stated in the project's feasibility study.

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"We also want to know why our share of the revenues from the project has fallen so much, so at least we can understand it and explain it to the people," he said.

A statement issued on Oyu Tolgoi's website (www.ot.mn) late on Tuesday put the total capital required for the project's first phase at $US6.6 billion, compared to $US5.7 billion in the original 2010 feasibility study.

It said concerns about the costs of the project had already been addressed in a series of meetings between both sides.

"The fact that these issues are still being raised underscores the importance of our ongoing efforts to communicate fully with the government and citizens of Mongolia," Oyu Tolgoi chief executive Cameron McRae said in the statement.

A Rio Tinto spokesman declined further comment.

The government source said the increased costs would have a considerable impact on the long-term sustainability of Oyu Tolgoi, and on Mongolia's efforts to raise funds for other major projects, including the massive Tavan Tolgoi coal mine and a billion-dollar railway building programme.

"We cannot have major financial institutions investing in a project that is not sustainable," he said, adding that the higher costs meant Mongolia would not receive dividends from the project until 2033, far beyond the original schedule of 2019.

"Given that the project is financed by debt not equity, you can imagine the financial costs will be tremendous and have an impact on the project's revenues for the government," he said.

The investment agreement passed by Mongolia's parliament in 2009 granted 34 per cent of Oyu Tolgoi to the Mongolian state and the other 66 per cent to Canada's Ivanhoe Mines, now known as Turquoise Hill Resources and controlled by Rio Tinto.

The project cost was initially estimated at around $4US billion, roughly the same as Mongolia's gross domestic product in 2009, and was also expected to pave the way for other huge mining deals, including Tavan Tolgoi.

But Mongolia has struggled to find the capital required not only to build the mines but also the infrastructure required to get minerals to market.

Mongolia's elected politicians have also been under pressure from the public over the dominant role played by foreign investors in the development of its economy. Some parliamentarians have called for Mongolia's stake in the project to be raised. Rio Tinto has rejected calls for renegotiation.

The original deal allowed the Mongolian government to increase its stake once investment in Oyu Tolgoi had been recovered. As the costs of the project increase, that period is likely to lengthen, the source said.

Mongolia was not currently seeking to renegotiate the initial investment agreement, but was also concerned about Rio's plans for the financing of the second phase of the project, which is eventually expected to produce 425,000 tonnes of copper and 460,000 ounces of gold a year once it goes into full operation, the source said.